Credit Union Regulatory Improvements Act of 2005 (CURIA)
Credit Union Regulatory Improvements
Act of 2005 (CURIA)
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
On May 12, 2005, regulatory modernization legislation for credit unions was
introduced as H.R. 2317. The three titles of the Credit Union Regulatory Improvements
Act (CURIA) would provide regulatory changes requested by credit union industry
advocates. These changes would provide supervisory flexibility to the National Credit
Union Administration (NCUA), the federal regulator for the credit union industry,
enhance the ability of credit unions to provide loans to their members, and ease credit
union regulatory burdens. For the past several years, credit union representatives have
asked Congress to increase their ability to serve their members by addressing the
growing costs of regulatory compliance and by providing additional flexibility through
regulatory reform measures. Omnibus legislation that would reduce existing regulatory
requirements on all depository financial institutions was enacted on October 13, 2006.
P.L. 109-351 contained four of the credit union specific relief provisions addressed in
CURIA. The law does not address two major issues covered by H.R. 2317, prompt
corrective action and member business loan restrictions. Credit union representatives
remain committed to the passage of all of the provisions of H.R. 2317. This report
provides background on the legislation and congressional interest in regulatory relief.
This report will not be updated.
Background
The Credit Union Regulatory Improvements Act (CURIA) provides regulatory relief
and reform for credit unions. The intent of this legislation is to modernize the prompt
corrective action system for credit unions, make adjustments to their loan authority, and
ease credit union regulatory burdens. H.R. 2317 was introduced on May 12, 2005; no
further action has been taken on this bill. CURIA contains three titles. Title I provides
the National Credit Union Administration (NCUA) more flexibility in operating the
statutorily mandated prompt corrective action (PCA) system used to resolve problems in
federally insured credit unions. The proposal would permit the NCUA to implement a
more risk-based approach. Title II amends the current restrictions on member business
loans. The 12 sections of Title III address specific rule changes to update and streamline
existing regulations. The regulatory relief provisions in Title III are similar to those
passed by the House in 2004 (H.R. 1375, 108th Congress) and in 2006 (H.R. 3505, 109th
Congress). The Financial Services Regulatory Relief Act of 2006 (P.L. 109-351) a
regulatory relief measure addressing all depository financial institutions was enacted on
October 13, 2006. The statute contains four relief provisions specific to credit unions.1
The four provisions are addressed in both CURIA and H.R. 3505. Credit union advocates
support the remaining provisions of CURIA to ensure the financial strength of credit
unions and enhance the services provided to credit union members. Opposition to the
legislation was expressed by three banking trade associations in a letter to the Speaker of
the House.2 The letter states that the legislation would increase the powers of credit
unions and raise serious safety and soundness concerns.
Although separate hearings were not held on CURIA, the House Financial Services
Committee’s Subcommittee on Financial Institutions did hold a hearing on H.R. 3505 on
October 18, 2005. Three additional hearings were held to review and consider regulatory
relief proposals. These hearings provided a forum to offer new or updated proposals.3
All four hearings featured testimony from federal regulators, trade associations, individual
institutions, and consumer advocates. Since 2001, Congress has been working with
regulators and industry representatives on legislative proposals to reduce existing
regulatory requirements and the compliance burdens they place on depository financial
institutions. The goal has been to identify outdated, duplicative, or ineffective regulations
that are not justified by either the need to ensure safety and soundness or to provide
consumer protection. This legislation would also counterbalance new responsibilities
placed on banks and thrifts by the anti-money laundering and the anti-terrorist financing
provisions of the 2001 USA PATRIOT Act (P.L. 107-56).
Witnesses at the hearings mainly addressed the institutions they represented or
regulated. The National Credit Union Administration and credit union representatives
testified at all four hearings. Testimony was supportive of H.R. 3505 but also encouraged
Congress to either incorporate all of the provisions of H.R. 2317 (CURIA) into the
omnibus regulatory relief legislation or pass the bill separately. Several witnesses
representing banks and savings associations expressed opposition to the capital and
lending authority provisions of CURIA that were not included in H.R. 3505. In general,
their position is that credit unions should not be granted authorities, which could enhance
their competitive strength, while continuing their exemption from federal income tax.4
1 Three provisions are identical to sections 301, 303, and 305 of Title III of CURIA. The fourth
provision amends the statutory definition of net worth; this is addressed in Title I of CURIA and
by both H.R. 3505 and H.R. 1042. Please see this report’s overview of the CURIA Titles.
2 The letter can be found at [http://www.icba.org/]; look under ICBA letters to Capitol Hill, letter
dated Mar. 1, 2006.
3 The Senate Committee on Banking , Housing, and Urban Affairs held hearings on June 21, 2005
and Mar.1, 2006, and the House Financial Services’ Subcommittee held a hearing on May 12,
4 For a discussion of this issue, please see CRS Report 97-548, Should Credit Unions Be Taxed?,
by James M. Bickley.
An Overview of the CURIA Titles
The Credit Union Regulatory Improvements Act of 2005 (H.R. 2317) was introduced
on May 12, 2005. The legislation had 109 co-sponsors by February 28, 2006. The
following is an overview of the bill’s three titles.
Title I — Capital Reform
This title reforms the prompt corrective action (PCA) system for federally insured
credit unions.5 After six years of experience with this congressionally mandated system,
the NCUA is seeking adjustments that provide supervisory flexibility and incorporate a
more risk-based approach. The objective of PCA is to minimize the probability of credit
union insolvency through early intervention by the federal regulator. PCA establishes a
net worth ratio framework that requires progressively more stringent mandatory and
discretionary regulatory actions for credit unions with low or declining net worth levels.
(Net worth is all of the credit union’s retained earnings.6)
CURIA would provide more flexibility to the current statutory requirements of the
PCA system. The bill would reduce the standard net worth ratio requirement for credit
unions to a level comparable to what is required of institutions insured by the Federal
Deposit Insurance Corporation. The proposal includes a more risk-based approach to
credit union capital standards. The legislation modifies the requirements for net worth
restoration plans imposed by the NCUA. In addition, the statutory definition of net worth
would be amended to address a potential problem raised by new merger guidance issued
by the Financial Accounting Standards Board.
Title II — Economic Growth
This title amends the authority of federal credit unions to make member business
loans. Many of the financial services provided by credit unions are similar to those offered
by banks and thrifts, but credit unions are distinguishable because of their cooperative
framework and unique charter requirements. Individual credit unions are owned by their
membership. Credit unions can make loans only to their members, to other credit unions,
and to credit union organizations. This title would enhance credit union member service
and help to maintain credit union competitiveness by making adjustments to the statutory
restrictions on member business loans.
Currently the aggregate limit on a credit union’s net member business loan balances
is the lesser of 1.75 times the credit union’s net worth or 12.25% of the credit union’s total
assets. CURIA would replace this limitation with a flat rate of 20% of the total assets of
a credit union. In addition, the legislation would exclude loans or loan participations to
nonprofit religious organizations from the member business loan limit. The definition of
a member business loan now excludes loan(s) that are equal to or less than $50,000.
CURIA would amend the definition to exclude loans of $100,000 or less.
5 PCA standards were mandated by P.L. 105-219 (12 U.S.C. 1790d).
6 Retained earnings normally includes undivided earnings, regular reserves and any other
appropriations of undivided earnings designated by management or regulatory authorities.
Provisions of this title would also enhance the ability of credit unions to assist the
economic revitalization efforts of distressed communities. It would give a credit union
operating in an underserved community more flexibility in regards to the leasing of space
in a building or property in which the credit union maintains a physical presence.
Currently, credit unions may lease space only if they have plans to take over the entire
property.
Title III — Regulatory Modernization
The provisions of this title are very similar to the legislation passed by the House in
2004 (H.R. 1375, 108th Congress). An overview of each of the 12 sections is provided
below.
Section 301. Leases of Land on Federal Facilities for Credit Unions
This section would give authorities in charge of buildings erected on federal property
the discretion to extend real estate leases at minimal charge to credit unions that finance
the construction of credit union facilities on the federal land.
Section 302. Investments in Securities by Federal Credit Unions
The investment authority of federal credit unions is limited by statute to loans,
government securities, deposits in other financial institutions, and certain other limited
investments. This may place them at a competitive disadvantage with state-chartered
credit unions and other depository financial institutions. This section would expand the
investment options by permitting a federal credit union to purchase for its own account
certain investment securities of a defined investment grade. The total amount of the
investment securities of any one obligor or maker could not exceed 10% of an institution’s
net worth.
Section 303. Increase in General 12-Year Limitation of Term of Federal Credit
Union Loans to 15 Years
Federal credit unions are authorized to make loans to members, other credit unions,
and to credit union organizations. Loans are restricted by a statutory 12-year maturity limit
with a few exceptions. This section would increase that maturity limit to 15 years, or to
longer terms if permitted by the NCUA.
Section 304. Increase in 1% Investment Limit in Credit Union Service
Organizations
Organizations that provide services to credit unions and credit union members are
commonly known as credit union service organizations (CUSOs). An individual federal
credit union is authorized to invest in aggregate up to 1% of its shares7 and undivided
earnings in CUSOs. This section would raise the limit to 3%.
7 Individual credit unions are owned by their membership. Members’ savings are referred to as
shares and earn dividends instead of interest.
Section 305. Check Cashing and Money Transfer Services Offered Within the
Field of Membership8
Federal credit unions are authorized to provide check cashing and money transfer
services to their members. In an effort to meet the needs of individuals who are not
account holders at mainstream depository financial institutions, this section would allow
federal credit unions to provide these services to anyone eligible to become a member.
Section 306. Voluntary Mergers Involving Multiple Common Bond9 Credit
Unions
The groups forming a multiple common bond charter are restricted to 3,000 members
under most circumstances. This numerical limitation has been a concern in voluntary
mergers of multiple common bond credit unions. The National Credit Union
Administration (NCUA) has required member groups resulting from the merger that are
larger than 3,000 to spin off and form separate credit unions. This section would provide
that this numerical limitation does not apply in voluntary mergers.
Section 307. Conversions Involving Common Bond Credit Unions
This section addresses voluntary mergers or conversions involving a single or
multiple common bond credit union and a community credit union. (Credit union charters
are granted by federal or state governments on the basis of a “common bond.” This
requirement determines the field of membership, and is unique among depository financial
institutions. The common bond for establishing a credit union might be occupational,
associational, or community. There are three types of federal credit union charters: single
common bond (occupational and associational), multiple common bond (more than one
group each having a common bond of occupation or association), and community.)
Community charters are required to be based on a single, geographically well-defined local
community neighborhood, or rural district. This section would require the NCUA to
establish the criteria to use to determine that a member group or other portion of a credit
union’s existing membership, located outside the community base, can be satisfactorily
served and remain within the newly constituted credit union’s field of membership.
Section 308. Credit Union Governance
This section deals with three separate issues. It provides for the expulsion of a
federal credit union member for a good cause10 by a majority vote of the institution’s board
of directors. Currently, a two-thirds vote of the membership is required. It would give
institutions the authority to limit the number of consecutive terms an individual could
serve on the board of directors in an effort to encourage broader representation on the
8 For more information on section 305 (which is also separate legislation, H.R. 749), please see
CRS Report RS22146, Expanded Access to Financial Services Act, by Pauline Smale.
9 Credit union charters are granted by federal or state governments on the basis of a “common
bond.” This requirement determines the field of membership, and is unique among depository
financial institutions. The common bond for establishing a credit union might be occupational,
associational, or community. There are three types of federal credit union charters: single
common bond (occupational and associational), multiple common bond (more than one group
each having a common bond of occupation or association), and community.
10 An example of good cause, provided by a credit union spokesman, is a member who is
disruptive to the operations of the credit union, including harassing personnel and creating safety
concerns.
board. Finally, federal credit unions would be able to reimburse volunteer board members
for wages they would otherwise forfeit by participating in credit union affairs.
Section 309. Providing the National Credit Union Administration with Greater
Flexibility in Responding to Market Conditions
The rate of interest on loans made by a federal credit union may not exceed 15%
under most circumstances. This section would permit the NCUA to consider whether
rising interest rates or the prevailing interest rate levels threaten the safety and soundness
of individual institutions when the agency debates lifting the usury ceiling.
Section 310. Credit Union Conversion Voting Requirements
This section deals with the process a credit union follows when it undertakes a
charter conversion to become a mutual savings bank. The NCUA has expressed concern
that the membership of the credit union needs to fully understand the effect a conversion
may have and therefore the importance of the membership’s vote on conversion. This
section would require a majority vote of at least 20% of the membership to approve a
conversion. Currently, the membership must approve the proposal to convert by the
affirmative vote of a majority of those members who vote on the proposal.
Section 311. Exemption from Pre-Merger Notification Requirement of the
Clayton Act
This section would give all federally insured credit unions the same exemption as
banks and thrift institutions from pre-merger notification requirements and fees of the
Federal Trade Commission.
Section 312. Treatment of Credit Unions as Depository Institutions Under
Securities Laws
This section would provide federally insured credit unions exceptions, similar to
those provided banks, from broker-dealer and investment adviser registration
requirements.